A group of robbers entered the minting unit of a country. There were many people inside the unit. The group held all of them hostage. They stayed there for days and started printing money. They printed thousands of currency notes; then millions, then billions. Finally, they stopped at €2.4 billion. And escaped.
Does this sound familiar to you? I’m sure it does.
I just summarized two seasons of the Netflix show, Money Heist in 50 words. While we enjoyed the thrill of the show, have we ever wondered what happened to the country’s economy when a sum, this large, was printed and robbed of the royal mint?
If anything of the sort ever happened in the real world, wouldn’t there be hyperinflation? Wouldn’t it push the economy into a recession epoch? How would the government contain the matter?
Let’s find out today, shall we?
How do government decisions impact inflation?
When we fall short of money, we simply cannot print more to compensate. This will lead to an even higher rate of inflation.
Inflation can be good. Inflation can be harmful. There is no established inflation target as such, but experts believe a rate of 2% or below to be acceptable or healthy.
For the past 70 months, the annual inflation rate of India has been above 6%. This seems far away from the ‘established target’ of 2%.
There are many methods used to control inflation. While some of them prove to be beneficial, some may wreak havoc. Like, when the government decides to control inflation through wage and price controls, it could lead to people losing jobs and recession.
Methods to control Inflation
There are three measures through which government policies and decisions can control inflation. They are-
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Monetary Measures
The first of many measures the government takes is increasing interest rates. When interest rates increase, borrowing money becomes difficult. This in turn decreases the demand in the economy which leads to decreased economic growth. Hence, the rate of inflation decreases.
This brings us to our second point that money supply and inflation are directly linked. Inflation can be kept in control if the money supply in the economy is regulated.
The central bank can also start issuing government bonds and securities to commercial banks and encourage them to buy those. Once the banks buy the securities, they have a lesser amount at their disposal to lend to the general public. This reduces the money supply in the economy and the inflation rate decreases. -
Fiscal Measures
This involves measures related to government revenue and expenditure.
During demand-pull inflation, the inflation rate can be controlled by regulating public expenditure.
But during the cost-push inflation, the government takes decisions that impact the common public directly, like freezing the wages of the workers and putting an upper and lower limit on prices of important utility items such as electricity, coal, etc. -
Price Control
The setting of minimum and maximum limits for some specific goods is called price control. It is done to increase the affordability of those goods. They are mostly applied in consumer staples like rent and gasoline. When it is practiced for a long period, it leads to other problems such as shortages, deterioration of product quality, rationing problems, and black markets for those goods.
Good information dude ....
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